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State Pension: I’d invest £500 per month in an ISA starting today to retire in comfort

The rising State Pension age means that it may be more difficult in the long run to retire in comfort. Furthermore, the cost of coronavirus could mean that the rate at which the State Pension rises in the coming years is less attractive than it has been in the past.

As such, now could be the right time to start buying FTSE 100 shares after the index’s recent crash. They appear to offer long-term growth potential that could be further enhanced through investing regularly in a tax-efficient account such as a Stocks and Shares ISA.

State Pension prospects

The State Pension currently amounts to just £9,110 per year. That’s around a third of the average annual salary in the UK. This suggests that it is unlikely to provide a sufficient income to enjoy financial freedom in retirement.

Furthermore, the age at which it starts being paid is due to rise to 68 within the next 30 years. And with the cost of coronavirus likely to mean eventual tax rises over the long run, it would be unsurprising for the speed at which it rises to slow as the government seeks to balance its books over the coming years.

Therefore, a passive income other than the State Pension is likely to become increasingly required in older age.

FTSE 100 investment prospects

Investing in FTSE 100 shares today to generate a retirement nest egg in addition to the State Pension may seem highly unappealing to many people. After all, the index has recorded sharp declines over recent months. Although they have been followed by a successful rebound for many stocks, the high volatility of the stock market could dissuade many individuals from buying shares.

However, by investing regularly in a Stocks and Shares ISA, you could obtain a surprisingly large retirement nest egg.

For example, the FTSE 100 has recorded an 8% annual return since inception. Assuming the same rate of growth on a £500 monthly investment over a 30-year time period would produce a nest egg of £680,000. Using this capital to generate a passive income of 4% per year would produce an annual income of around £27,200. That’s almost three times the current State Pension, which suggests that it is a worthwhile move.

Potential risks

Of course, in the short run the index could experience a decline. Short-term risks such as a second wave of coronavirus could hurt investor sentiment. But it continues to offer a long-term solution to an unattractive State Pension that could become increasingly ineffective at providing a worthwhile income in older age. After all, the FTSE 100 has always recovered from its short-term falls to produce long-term growth.

Therefore, now could be the right time to start investing regularly in shares. They could offer an improving retirement outlook for anyone with a long-term time horizon.

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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.